Legendary Investor Howard Marks Warns 'Governments Can't Keep Us Aloft Forever' After Blasting Government's Trillions In 'Leverage'

Howard Marks, co-founder and co-chair of Oaktree Capital Management, has words of warning about the state of the economy.

In a recent interview on Bloomberg, Marks shared that "governments can't keep us aloft forever."

With the U.S. national debt at over $34.5 trillion and rising at a pace of roughly $1 trillion every 100 days, he has a point.

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This equates to around $102,000 of government debt per U.S. citizen and $266,500 per U.S. taxpayer.

America's employers added 275,000 jobs, with 52,000 of them being in government, according to the most recent jobs report. Government jobs were the second largest category of job growth, behind jobs in healthcare.

For now, the government's high rate of spending has continued to support the stock market, as the "government has taken on a lot of leverage" in part to help get the economy out of the 2008-09 financial crisis and the COVID-19 pandemic, while "corporate balance sheets are generally OK." 

One consequence if investors start to question the rate of increase in government debt could be that borrowing costs will rise higher, as investors demand a higher yield to compensate for increased perceived risk.

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According to an analysis by the Congressional Budget Office, federal expenses on interest payments are set to exceed the amount the U.S. will spend on its defense budget.

The U.S. government must continue to borrow to fund its obligations, a fact Marks pointed to by sharing "governments don't make money, they're not expected to make money, and they pay their debt by running a printing press."

The iShares 20 Plus Year Treasury Bond ETF TLT, which tracks long-term U.S. government bonds, has fallen 45% since its mid-2020 high, when the government spent significant money to help alleviate the COVID-19 pandemic.

Bond prices move inversely to yields, and yields have soared since then, making future government debt even more expensive.

Marks does see optimism in credit markets, saying, "The only thing I'm sure of is if interest rates are higher, the people who invest in credit instruments, which is what we do, are buying in at higher yields," leading to "higher returns than they have in the recent past."

Savers also experience good fortune in times of high interest rates, with many money market funds continuing to yield over 5%.

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